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Stocks finished lower last week, snapping a three-week winning streak. A big rally Friday, however, took the edge off what had been a much poorer showing through Thursday. Investors were braced by hopes that a bailout deal in Cyprus would be reached soon, as well as by good earnings from
Nike,
NKE 0.20368574199806014%Nike Inc. Cl BU.S.: NYSEUSD51.655
0.1050.20368574199806014%
/Date(1481308105004-0600)/
Volume (Delayed 15m)
:
2496507
P/E Ratio
23.213963963963963Market Cap
85840131181.9595
Dividend Yield
1.397108761036189% Rev. per Employee
467369More quote details and news »NKEinYour ValueYour ChangeShort position
among other companies reporting.

The angst among U.S. investors created by the financial crisis in the small island nation—just 0.2% of the euro area's gross domestic product—almost makes it seem as if the market is searching for a reason to correct after its quick 9% rise this year. Investors expect the Cypriots to cut a deal on the weekend to qualify the country for a euro-zone bailout.

The Dow Jones Industrial Average lost two points on the week, effectively flat, to 14,512.03, after rising 91 points Friday. The Standard & Poor's 500 index gave up four, or 0.2%, to 1556.89. Unlike the Dow, it still hasn't managed to close higher than its previous all-time high, 1565, set on Oct. 9, 2007. The Nasdaq Composite fell four points, or 0.1%, to 3245.00.

While the pain for the Cypriot people is real, the stock market isn't worried about Cyprus, per se. The U.S. GDP "creates a new Cyprus by lunchtime," observes Mark Luschini, the Chief Investment Strategist for Janney Montgomery Scott. Investors fear, he adds, that if somehow little Cyprus leaves or is expelled from the euro zone, other bigger and more problematic countries, such as Italy and Spain, could follow or see bank runs.

"Cyprus was an excuse," says Richard Weeks, a partner at Hightower Advisors. There are many investors who say the market is due for a correction, and many who want the market to correct so they can buy in at lower prices, he adds; "When that happens, it's hard for the market to go down…There don't seem to be legs to the downside."

That doesn't mean the market can't produce a 5% to 7% correction, but that isn't likely until "you see signs internally that it is weakening," such as breadth worsening or sectors not participating, he says.

After the close of trading Thursday, Nike (ticker: NKE) said its fiscal third-quarter earnings soared 55%, on both revenue that was up 9% and a one-time gain, beating market expectations. Nike rose 11% Friday to $59.53.

If the stock market is searching for an excuse to correct, it might have to look elsewhere because the euro zone is running out of peripheral countries with huge debt problems.

With the first quarter ending next week, some volatility could come from "window dressing," as institutional investors rearrange their portfolios for their end-of-quarter statement by purchasing winning stocks and shedding losers.

In a market rally, investors might be tempted to see mining stocks as a bargain bin, but they should think twice. Things are likely to get materially worse for the group before they get better.

Roughly two-thirds of the world's mined iron ore goes to China to supply its growing economy, but the country is increasing its own production of ore at a faster rate than investors are projecting. Moreover, China is making a concentrated effort to slow down its overheated property and construction markets, which suggests a reduced need for steel and, in turn, iron-ore imports.

This is only slowly working its way into investor consciousness.

Last week, for example, two Wall Street brokerages published reports suggesting ore prices are vulnerable and that a significant oversupply of ore will arrive sooner than previously thought.

Cowen Securities said that the run-up in ore prices to about $160 a metric ton earlier this year was sentiment driven and that more price pressure is ahead. Currently, ore fetches about $134 a ton.

Goldman Sachs, meanwhile, pulled forward its expectation of an ore surplus to next year from 2015. That's due to a sharp rise in global ore mining and capacity, because some of the larger big new mines being built are past the point where they can be canceled. The broker also noted a rise in China's recycling of steel, lower ore demand there, and growing Chinese domestic ore supplies. Goldman downgraded its rating of Rio Tinto to Sell from Neutral.

More bearish still is Axiom Capital Management analyst Gordon Johnson, who believes ore prices are set for a significant drop this year, not next: "There's an acute amount of ore supply being added in Australia that will hit in the second half of 2013, the likes of which the iron ore industry has never seen." That, plus a significant amount of new domestic Chinese ore capacity will lower the demand for imports in that nation, he adds, and this isn't generally included in Wall Street's estimates.

Johnson is predicting average annual ore prices to drop to $119 this year, $85 next year, and $75 in 2015, versus consensus projections of about $125, $115, and $110, respectively. "Wall Street is grossly underestimating Australian capacity and production," he warns.

There's about 172 million tons of capacity being built this year Down Under, adding to the 76 million built last year. Total global ore exports last year ran 1.1 billion tons. Johnson projects that supply this year will exceed demand by 100 million tons, six times greater than the previous oversupply of 16 million tons in 2010. Consequently, the price will drop below $100 a ton by the end of the year, he says.

Some investors are acting on the prospect of lower prices. Last week Channing Smith, a portfolio manager at Capital Advisors, sold all the firm's BHP shares, for example.

"In the near term, we have become increasingly concerned about the sustainability of metal pricing with global iron ore plants increasing capacity and current surpluses in copper inventories. Our biggest concern is the trajectory of future Chinese demand for commodities," he says.

More downside is ahead unless there are announcements of some big capacity cuts or an unexpected spurt in Chinese growth.

In the year ended Feb. 2, sales rose 2% to $19.3 billion, but earnings per share fell—a relatively unusual occurrence for this retailer—to $4.17 from $4.30 the prior year. Comparable same-store sales increased just 0.3% and operating margins were 9.8%. In the previous three years, same-store sales averaged 1.8% and margins averaged more than 11%.

With roughly 50% of sales from women's and men's apparel, Kohl's was hurt last year by higher cotton prices. Inventory became an issue too, and resulting markdowns reduced operating margins.

The stock has paid the price, because many investors fear Kohl's growth slowdown is permanent. The shares have significantly underperformed a booming broad market. Looking at the industry group, retailers in general have suffered from worries about consumer sentiment and buying power after the rise in the payroll tax.

Since hitting a 52-week high of $55.11 in November, Kohl's stock is down 16% while the market is up 8% over the same period. Longer term, since 2009 Kohl's shares have traveled mostly between $42 to $58, and are now priced towards the bottom of that range at Friday's close of $46.32.
Macy'sM -1.3930810308799628%Macy's Inc.U.S.: NYSEUSD42.47
-0.6-1.3930810308799628%
/Date(1481308103025-0600)/
Volume (Delayed 15m)
:
1531053
P/E Ratio
19.3886422916762Market Cap
13165207385.0494
Dividend Yield
3.563842341279207% Rev. per Employee
165497More quote details and news »MinYour ValueYour ChangeShort position
(M) shares are up 28% since last summer.

Kohl's stock could return 20% over the next 12 to 18 months. It yields 3%. Yet Wall Street's expectations for the Menomonee Falls, Wis.-based company are subdued at best. In the past few days, two more brokers downgraded the stock, and now 15 out of the 25 analysts who follow Kohl's have Neutral or Sell ratings.

The expectation bar is low enough that the stock presents a significant opportunity, with relatively low risk, should the company make even modest strides toward improving results this year back towards its 10% earnings-growth track record.

The current price discounts most if not all of Kohl's problems, opines Francis Alexander, a portfolio manager with Jacob Asset Management, a value shop that owns the shares.

Kohl's has long been a growth story, but that has slowed and management seems to be adjusting to that by opening fewer and fewer stores each year, Alexander adds. This year it will be 12 versus 50 in 2009.

Despite 2012's weak results, Kohl's has a number of things going for it that haven't changed and that should make investors looking for value take notice, he says. While the operating margins are down, they remain better than competitors like Macy's, at 9.6%, and money-losing
J.C. PenneyJCP -3.6865530303030303%J.C. Penney Co. Inc.U.S.: NYSEUSD10.1707
-0.3893-3.6865530303030303%
/Date(1481308103141-0600)/
Volume (Delayed 15m)
:
8881886
P/E Ratio
N/AMarket Cap
3255648000.46157
Dividend Yield
N/ARev. per Employee
119829More quote details and news »JCPinYour ValueYour ChangeShort position
(JCP). Indeed, Penney's well-publicized makeover and serious sales stumbles over the past 12 months should eventually help Kohl's.

The bear case for Kohl's is that revenue increases are slowing and margins are staying where they are, less than 10%. Alexander believes Kohl's problems are more cyclical than secular. With a stronger U.S. economy—and not necessarily one going gangbusters—consumers will feel better about buying, and that will be good for Kohl's, which has 1,155 stores across the country, many in strip malls.

Kohl's stock valuation on numerous metrics, whether its forward price/earnings ratio of 10.6 or trailing P/E of 11, are near long-term historical lows. The ratio of enterprise value (net debt plus market capitalization) to earnings before interest, taxes, depreciation, and amortization (Ebitda) is down to 5.5 times, just above a low of 5.4. With about $4.5 billion in debt versus $6 billion in shareholders equity, the balance sheet is in good shape.

Alexander points out that Kohl's is doing shareholder-friendly things, like the 9% boost in the dividend it announced in February. Last November, the retailer increased the authorization for its stock buyback program by $3.2 billion to $3.5 billion over the next three years, equal about one-third of the company's market at the current price.

The portfolio manager values Kohl's stock at $55, or about 11 times expected earnings of near $5 a share in calendar 2014. Kohl's isn't a broken business, and there seems to be more upside than downside from here.